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News on Inflation and the Epidemiology of Inflation Expectations

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  • Pfajfar, D.
  • Santoro, E.

    (Tilburg University, Center for Economic Research)

Abstract

Abstract: This paper examines the nexus between news coverage on inflation and households' inflation expectations. In doing so, we test the epidemiological foundations of the sticky information model (Carroll, 2003, 2006). We use both aggregate and household-level data from the Survey Research Center at the University of Michigan. We highlight a fundamental disconnection between news on inflation, consumers' frequency of expectation updating and the accuracy of their expectations. Our evidence provides at best weak support to the epidemiological framework, as most of the consumers who update their expectations do not revise them towards professional forecasters' mean forecast.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2012-048.

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Date of creation: 2012
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Handle: RePEc:dgr:kubcen:2012048

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Web page: http://center.uvt.nl

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Keywords: Inflation; Survey Expectations; News; Information Stickiness;

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References

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  1. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
  2. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information Versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," Harvard Institute of Economic Research Working Papers 1922, Harvard - Institute of Economic Research.
  3. Alan S. Blinder & Alan B. Krueger, 2004. "What Does the Public Know about Economic Policy, and How Does It Know It?," Working Papers 103, Princeton University, Department of Economics, Center for Economic Policy Studies..
  4. Mark Doms, 2004. "Consumer sentiment and the media," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct22.
  5. Lanne, Markku & Luoma, Arto & Luoto, Jani, 2008. "A Naïve Sticky Information Model of Households’ Inflation Expectations," MPRA Paper 8663, University Library of Munich, Germany.
  6. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky Information: A Model of Monetary Nonneutrality and Structural Slumps," Harvard Institute of Economic Research Working Papers 1941, Harvard - Institute of Economic Research.
  7. Christopher D. Carroll, 2003. "Macroeconomic Expectations Of Households And Professional Forecasters," The Quarterly Journal of Economics, MIT Press, vol. 118(1), pages 269-298, February.
  8. Jörg Döpke & Jonas Dovern & Ulrich Fritsche & Jiri Slacalek, 2006. "The Dynamics of European Inflation Expectations," Discussion Papers of DIW Berlin 571, DIW Berlin, German Institute for Economic Research.
  9. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
  10. Ricardo Nunes, 2009. "On the Epidemiological Microfoundations of Sticky Information," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(5), pages 643-657, October.
  11. Michael J. Lamla & Sarah M. Lein, 2008. "The Role of Media for Consumers' Inflation Expectation Formation," KOF Working papers 08-201, KOF Swiss Economic Institute, ETH Zurich.
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Citations

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Cited by:
  1. Lena Dräger & Ulrich Fritsche, 2013. "Don't Worry, Be Right! Survey Wording Effects on In flation Perceptions and Expectations," Macroeconomics and Finance Series 201308, Hamburg University, Department Wirtschaft und Politik.
  2. Michael J. Lamla & Lena Dräger, 2013. "Imperfect Information and Inflation Expectations: Evidence from Microdata," KOF Working papers 13-329, KOF Swiss Economic Institute, ETH Zurich.
  3. Dräger, Lena & Lamla, Michael J., 2012. "Updating inflation expectations: Evidence from micro-data," Economics Letters, Elsevier, vol. 117(3), pages 807-810.
  4. Pfajfar, Damjan, 2013. "Formation of rationally heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 37(8), pages 1434-1452.
  5. Menz, Jan-Oliver & Poppitz, Philipp, 2013. "Households' disagreement on inflation expectations and socioeconomic media exposure in Germany," Discussion Papers 27/2013, Deutsche Bundesbank, Research Centre.
  6. Michael J. Lamla & Lena Dräger, 2013. "Anchoring of Consumers’ Inflation Expectations: Evidence from Microdata," KOF Working papers 13-339, KOF Swiss Economic Institute, ETH Zurich.
  7. Hull, Isaiah, 2013. "Predicting the Spread of Financial Innovations: An Epidemiological Approach," Working Paper Series 279, Sveriges Riksbank (Central Bank of Sweden).
  8. Ueno, Yuko, 2014. "Updating Behavior of Inflation Expectations: Evidence from Japanese Household Panel Data," CIS Discussion paper series 617, Center for Intergenerational Studies, Institute of Economic Research, Hitotsubashi University.

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